The week before last, my ECONS102 class covered intellectual property rights. So, the unfolding story of the US announcing the waiving of patent protection for coronavirus vaccines is timely. As the New Zealand Herald reported:
The United States is throwing its support behind efforts to waive intellectual property protections for Covid-19 vaccines in an effort to speed the end of the pandemic.
US trade representative Katherine Tai announced the Government's position amid World Trade Organisation talks over easing rules to enable more countries to produce more of the life-saving vaccines.
"The Administration believes strongly in intellectual property protections, but in service of ending this pandemic, supports the waiver of those protections for Covid-19 vaccines," Tai said.
But she cautioned that it would take time to reach the required global "consensus" to waive the protections under WTO rules, and US officials said it would not have an immediate effect on the global supply of Covid-19 shots.
The announcement has generated a lot of debate. Before we get to that though, let's review the arguments for and against strong protection of intellectual property rights. The 2018 Nobel Prize winner William Nordhaus outlined the trade-off inherent in intellectual property rights. Strong protection of intellectual property rights provides an incentive for investment in the creation or development of new intellectual property, but this also provides a limited monopoly to the holder of the intellectual property rights (patents are one example, but so are trademarks, which I discussed in this 2018 post). The monopoly that the strong intellectual property rights creates leads to a higher price for the goods or services derived from the intellectual property, and under-consumption (relative to the welfare-maximising quantity of consumption). Weak protection of intellectual property rights allows anyone to make use of the intellectual property, but reduces the incentive to create it in the first place. This is the trade-off: strong protection of intellectual property rights leads to under-consumption, but weak protection leads to under-investment.
By waiving the intellectual property rights on patented coronavirus vaccines, the US would move the needle from strong protection to weak protection. In theory, that would lower the price of vaccines and increase the quantity consumed. However, that assumes that the pharmaceutical firms are deriving monopoly profits from the vaccines. Despite Pfizer reportedly making billions of dollars from vaccine sales, and no doubt the other pharmaceutical firms are doing likewise, are they really profit maximising here? Remember that coronavirus vaccine sales are being made in response to advance market commitments - governments lined up to guarantee future vaccine purchases at an agreed price before any vaccine had even been approved. Although the pharmaceutical firms had a lot of market power, it seems unlikely that they were really exploiting that power in the face of a high degree of public scrutiny (they're not all being run by Martin Shkreli, after all).
However, as most commentators on the announcement have noted, the assumption that pharmaceutical firms are restricting the supply of vaccines in order to raise the price (which is what a monopoly firm would do in order to maximise profits) doesn't stand up to scrutiny. As Alex Tabarrok noted:
Patents are not the problem. All of the vaccine manufacturers are trying to increase supply as quickly as possible. Billions of doses are being produced–more than ever before in the history of the world. Licenses are widely available. AstraZeneca have licensed their vaccine for production with manufactures around the world, including in India, Brazil, Mexico, Argentina, China and South Africa. J&J’s vaccine has been licensed for production by multiple firms in the United States as well as with firms in Spain, South Africa and France. Sputnik has been licensed for production by firms in India, China, South Korea, Brazil and pending EMA approval with firms in Germany and France. Sinopharm has been licensed in the UAE, Egypt and Bangladesh. Novavax has licensed its vaccine for production in South Korea, India, and Japan and it is desperate to find other licensees...
That doesn't sound like firms that are trying to restrict supply. At least, that's the outward impression one gets. The vaccine supply chain is complicated, and has lots of moving parts. Derek Lowe has written about where the bottlenecks in the vaccine supply chain really are. He is worth quoting at length:
I’ve gone over these other problems before, but here’s a brief summary of those – not in any order, because it’s difficult to rank them and those ranks change. An obvious first problem is hardware: you need specific sorts of cell culture tanks for the adenovirus vaccines, and the right kind of filtration apparatus for both the mRNA and adenovirus ones. You also need specialized mixing equipment for the formation of the mRNA lipid nanoparticles. A good proportion of the world’s supply of such hardware is already producing the vaccines, to the best of my knowledge. Second, you need some key consumable equipment to go along with the hardware. Cell culture bags have been a limiting step for the Novavax subunit vaccine, as have the actual filtration membranes needed for it and others. These are not in short supply because of patents, and waiving vaccine patents will not make them appear. Third, you need some key reagents. Among others, there’s an “end-capping” enzyme that has been a supply constraint, and there are the lipids needed for the mRNA nanoparticles, for those two vaccines. Those lipids are indeed proprietary, but their synthesis is also subject to physical constraints that have nothing to do with patent rights, such as the availability of the ultimate starting materials. Supplies have been increasing via the tried and true method of offering people money to make more, but switching over equipment and getting the synthesis to work within acceptable QC is not as fast a process as you might imagine. Fourth, for all these processes, there is a shortage of actual people to make the tech transfer work. For most reasonably complicated processes, it helps a great deal to have experienced people come out and troubleshoot, because the number of tiny things that can go wrong is not easy to quantify. Moderna, for one, has said that a limiting factor in their tech-transfer efforts is that they simply do not have enough trained people to go around. And keep in mind that these all have to do with producing a stream of liquid vaccine solution – but you need what the industry calls “fill-and-finish” capacity to deal with it after that. Filling and capping sterile vials for injection is a specialized business and the great majority of large-scale capacity is already being used for the existing vaccines. Time and money will fix that, and has been, but waiving vaccine patents won’t.
Eric Crampton made some related points here. I'm not a huge defender of patents. I talk at length in my ECONS102 class about the problems they generate. But, for once at least, it is likely that patents are not the problem here. Similarly, pharmaceutical firms have a lot to answer for. Unlike their early approach to AIDS drugs though, it doesn't seem like they are the problem either. In fact, for once the pharmaceutical firms may actually be primarily focusing on providing social good (no doubt with a selfish eye on the good publicity that comes from being a successful vaccine manufacturer that 'saved the world').
We should also be considering the long-term incentives here. If governments squash intellectual property rights early following this pandemic, then that reduces the incentive for pharmaceutical firms to generate vaccines in the advent of future pandemics (remember the trade-off between strong protection and weak protection of intellectual property). If governments are intent on this path, then they really need to consider some alternative way of maintaining the incentive to innovate. Perhaps creating a fund like the Health Impact Fund, but for contingencies such as future pandemics. The WHO (or some other body) could administer the fund, which would be built up by contributions from governments. In the advent of a pandemic, pharmaceutical firms could be paid out of the fund, in exchange for making their vaccines available in the public domain. The challenge of course is determining the right amount to pay out of the fund. Perhaps the fund could be combined with a predetermined advance market commitment that would apply to any pandemic. It's a difficult question, with many aspects to be worked through, but definitely worth considering.
[Update:] The Economist also raises some good points (which I have also seen elsewhere):
We believe that Mr Biden is wrong. A waiver may signal that his administration cares about the world, but it is at best an empty gesture and at worst a cynical one.
A waiver will do nothing to fill the urgent shortfall of doses in 2021. The head of the World Trade Organisation, the forum where it will be thrashed out, warns there may be no vote until December. Technology transfer would take six months or so to complete even if it started today. With the new mrna vaccines made by Pfizer and Moderna, it may take longer. Supposing the tech transfer was faster than that, experienced vaccine-makers would be unavailable for hire and makers could not obtain inputs from suppliers whose order books are already bursting. Pfizer’s vaccine requires 280 inputs from suppliers in 19 countries. No firm can recreate that in a hurry.
In any case, vaccine-makers do not appear to be hoarding their technology—otherwise output would not be increasing so fast. They have struck 214 technology-transfer agreements, an unprecedented number. They are not price-gouging: money is not the constraint on vaccination. Poor countries are not being priced out of the market: their vaccines are coming through covax, a global distribution scheme funded by donors.
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